Você está na página 1de 30

Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012.

. 1 Web Chapter 2: Illegality and public policy The law does not allow us to contract about this W2.1 What are illegal contracts? W 2.1.1 Statutory illegality Diagram W2A Overview: Categories of illegal contracts W2.1.2 Common law illegality W2.1.2.1 Contracts to commit a crime W2.1.2.2 Contracts made for the deliberate commission of a civil wrong W2.1.2.3 Contracts interfering with the administration of justice W2.1.2.4 Contracts to oust the jurisdiction of the courts W2.1.2.5 Contracts prejudicial to the state W2.1.2.6 Contracts which further sexually immoral purposes W2.1.2.7 Contracts prejudicial to family life W2.1.2.8 Contracts unduly restrictive of personal liberty W2.1.2.9 Contracts in restraint of trade W2.1.2.10 Restrictive trading and analogous agreements W2.1.3 Illegality and unfairness W2.2 The effects of illegality W2.2.1 The enforceability of the contract W2.2.1.1 Illegality at formation Diagram W2B The enforceability of illegal contracts W2.2.1.2 Intention to achieve an illegal purpose or perform illegally W2.2.1.3 Subsequent illegality of means W2.2.1.4 Severance W2.2.2 The availability of restitution Diagram W2C Restitution of benefits transferred under an illegal contract W2.2.2.1 Unequal blame W2.2.2.2 Timely withdrawal W2.2.2.3 Independent property rights W2.2.3 The future: the Law Commissions suggestion The illegality doctrine relates to contracts which are illegal or contrary to pu blic policy (hereafter illegal contracts). Contracts may be tainted because: making such contracts is itself prohibited, or more usually because its means (the method of performance) is illegal; or the contracts ends (purposes) are illegal. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 2 Contracts that become illegal by changes in the law subsequent to formation are dealt with by the doctrine of frustration (see ch 7). On one view, the illegality doctrine represe nts the most open and direct interference with contract parties freedom to determine the substance of t heir contracts. An alternative view is that it designates the class of unworthy contracts to which th e law will not lend its support or force. Sir William Holdsworth said:1 [A] body of law like the common law, which has grown up gradually with the growt h of the nation, necessarily acquires some fixed principles, and if it is to maintain the se principles it must be able, on the ground of public policy or some other like ground, to suppr ess practices which, under ever new disguises, seek to weaken or negative them. Lord Mansfield explains in Holman v Johnson (1775) that courts will not assist o ne whose cause of

action is founded upon an immoral or an illegal act (ex dolo malo non oritur acti o). Thus, in general courts will refuse to enforce an illegal contract even though it meets a ll the requirements of formation (Part I) and is otherwise untainted by any vitiating factor (Part III) . Nor will it grant restitution of any money or property transferred under it. For example, no remed y was given in: Parkinson v College of Ambulance Ltd (1925), where P donated 3,000 to C on the promise of Cs secretary to procure a knighthood for P which failed to eventuate, and Pearce v Brooks (1866), where P hired out an ornamental carriage to B, a prostit ute, for use in her trade but which B returned in a damaged condition and refused to pay for. The questions to be considered are: (1) What are illegal contracts? (2) When are contracts exceptionally enforceable despite their illegality? 1 History of English Law, Vol III, 55. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 3 (3) When will restitution exceptionally be allowed of the benefits transferred u nder an illegal contract? The case law is vast and the answers to these questions are far from simple. The first point to make is that, although contracts are sometimes said to be void for illegality or contra vention of public policy, this does not necessarily equate with contracts void on other grounds (s uch as common mistake). Thus, illegality will be used to refer to the whole range of cases where contract law denies a contract its ordinary legal consequences because of some prohibition, b reach of duty, or contravention of public policy. We will see that the consequences of illegality vary according to factors such as: the nature and seriousness of the illegality, how far the contract was carried through, the parties states of mind, and the intricacies of certain property and trust law rules. W2.1 What are illegal contracts? Diagram W2A gives an overview of the types of illegality. W2.1.1 Statutory illegality A contract may be illegal because its formation, purpose, or performance contrav enes some statute or the common law. It is difficult to generalise about the wide range of statuto ry prohibitions although they are often designed to secure fair trading conditions, safeguard pr operty and personal safety, and prevent competitive markets from being undermined. Some examples are the prohibition on the marketing or sale of certain knives (Restriction of Offensive Weapons Act 1959; Offensive Weapons Act 1996; Knives Act 1997) and the sale of body parts (Human O rgan Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 4

Transplants Act 1989). Many common law illegalities (see W2.1.2) have become the subject of statutory control or prohibitions. The relevant statute may stipulate different consequences. For example, it may expressly prohibit the making of the contract (courts are reluctant to imply a p rohibition), barring enforcement by or restitution to either party (Re Mahmoud and Ispahani ( 1921)); only bar enforcement by one of the parties (eg s 40 Consumer Credit Act 1974; s 77 Sex Discrimination Act 1975; s 72 Race Relations Act 1976; ss 26, 27 Financial Servi ces and Markets Act 2000); permit enforcement by either party because the statutory intent is only to impos e a penalty and not to deny contractual enforcement (St John Shipping Corporation v Joseph R ank Ltd (1957)); or render the contract void and unenforceable but not bar restitution (eg s 10 Bill of Sales Act 1878; s 395 Companies Act 1985). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 5 Diagram W2A Overview: Categories of illegal contracts Where statutes are silent (as they often are) on the effect of the illegality on the contract while setting out the administrative and penal sanctions, courts must decide the conse quences on the same general principles as are applicable to common law illegality (see W2.2). Mohame d v Alaga & Co (2000) involved an oral contract by M to introduce refugees to A (and act as tra nslator) in exchange for half the legal aid fees A could claim for work in respect of the refugees imm igration and asylum applications. The contract was unenforceable by reference to legislation2 preventing solicitors from sharing their fees. However, the Court of Appeal allowed Ms claim for quantum meruit (the value of services) because the parties were not equally to blame. A had knowingly 2 Rule 7 of the Solicitors Practice Rules 1990, made pursuant to s 31 Solicitors Act 1974. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 6 disregarded the professional conduct rules, while M had been unaware of any impr opriety in the arrangement. Section 335(1) Gambling Act 2005 states that the fact that a contract relates to gambling shall not prevent its enforcement provided that it is not otherwise unlawful (s 3 35(2)). This reverses the previous bar on enforcement and restitution in respect of gaming and wagerin g contracts. However, section 336(4) empowers the Gaming Commission to make an order renderin g any contract or other arrangement in relation to the bet void and order the repaymen t of money paid where it is satisfied that the bet was substantially unfair.

W2.1.2 Common law illegality With statutory illegality, courts discern and apply the conception of public pol icy contained therein. However, where courts refuse to recognise a contract as contravening public poli cy at common law, they are vulnerable to the charges of: usurping the function of Parliament; giving effect to their subjective opinions on matters of morality and the public good; and undermining the freedom, sanctity, and stability of contracts. Burroughs J saw public policy as a very unruly horse, and when once you get astri de it you never know where it will carry you (Richardson v Mellish (1824) at 252). Lord Dennings (predi ctable) response is that with a good man in the saddle, the unruly horse can be kept in control. I t can jump over obstacles. It can leap the fences put up by fictions and come down on the side o f justice (Enderby Town Football Club Ltd v The Football Association Ltd (1970) at 1026). The categories of public policy are often said to be closed. Characteristically, the picture presented is of general respect for the sanctity of contract, subject to a serie s of exceptions Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 7 established by clear precedents. While it is still not open to courts to reject a contract unless it falls within one of the well-established heads of illegality, courts have been willing t o extend existing categories to reflect changing social and moral values. As Dankwerts LJ said in Nagle v Feilden (1966 at 650): [T]he law relating to public policy cannot remain immutable. It must cha nge with the passage of time. The wind of change blows upon it. Chitty concludes (at [16-004]) that the difference between extending an existing principle as opposed to creating a new one will often be w afer-thin. In a system of law that evolves (albeit gradually) like the common law, the content of the p ublic policy (which reinforces the law) cannot remain static, but must change with the evolution of public opinion, morality, and legislative policies. Pause for reflection The law fails if it does not reflect a societys changing values over time. For ex ample, the older cases reflect a preoccupation with gambling, marriage brokerage, and unmarried cohabitation. T oday we may be more concerned with the commercialisation of babies, child labour, body parts, reprod uctive services, sex, weapons, and addictive drugs (see 13.9). In Tinsley v Milligan (1993), the objec tion was social security fraud rather than the parties lesbian cohabitation (see W2.2.3). Further, the scope of impermissible restraint of trade has been modified in response to changing economic conditions (see W2.1.2.9). Writers disagree on how to categorise the heads of public policy, but the differen ces are largely of exposition rather than of substance. A detailed account of each categ ory is not proposed here; the law of restraint of trade, for example, fills whole books. What follow

s is a brief overview of the kinds of contracts held at common law to contravene public policy. W2.1.2.1 Contracts to commit a crime This is the most obvious category of illegal contracts. Examples include contrac ts which: Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 8 breach building licence regulations (Bostel Bros Ltd v Hurlock (1949)); breach exchange controls (Bigos v Bousted (1951)); defraud the revenue (Miller v Karlinski (1945)); defraud the rating authority (Alexander v Rayson (1936)). This public policy also taints any contract which: enriches someone for acting unlawfully (eg, in Beresford v Royal Insurance Co Lt d (1938), a person insured his own life for 50,000 and then committed suicide (then a criminal offence); his estate could not claim although the policy expressly cove red suicide); although lawful in itself, is made with the purpose of furthering a criminal or civil wrong (eg, in Langton v Hughes (1813), juices and spices were sold to be used illegall y for flavouring beer). An offence committed in the course of an otherwise legal contract will not neces sarily taint the contract (see further W2.2). W2.1.2.2 Contracts made for the deliberate commission of a civil wrong Examples include contracts to: beat up another person (Allen v Rescous (1676)); publish a libel (Clay v Yates (1856)); perpetrate a fraud (Willis v Baldwin (1780)); indemnify a person against loss resulting from his own deliberate criminal or to rtious act (Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd (1957)). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 9 W2.1.2.3 Contracts interfering with the administration of justice Contracts which amount to a conspiracy to pervert the course of justice include agreements: to stifle a prosecution (eg, in R v Andreas Panayiotou (1973), for rape); to refrain from disclosing misconduct that ought to be disclosed to those with a proper interest to receive it (eg, Initial Services Ltd v Putterill (1968), unregistere d price-fixing agreement, and see A-G v Guardian Newspapers Ltd (No 2) (1990)); to give false evidence in criminal proceedings (R v Andrews (1973)); to obstruct bankruptcy proceedings (Elliott v Richardson (1870)); to maintain or support litigation in which a party has no legitimate concern witho ut just cause or excuse (Hill v Archbold (1968)), although just cause and excuse is now wi dely interpreted (Giles v Thompson (1993) at 32833) to permit litigation supported by unions or insurance companies; of champerty (ie financing anothers litigation with a view to taking a share in its proceeds) which amounts to an aggravated form of maintenance (Giles v Thompson);

but s 58 Courts and Legal Services Act 1990 and s 27 Access to Justice Act 1999 perm it certain no win, no fee and other conditional fee agreements between lawyers and th eir clients in the interest of increasing access to justice. W2.1.2.4 Contracts to oust the jurisdiction of the courts It is contrary to public policy to deny the important constitutional principle o f access to the courts for redress against legal injuries. However, the law must balance this with the competing interest of facilitating speedy, convenient, and affordable dispute resolution. Thus, partie s can agree not to resort to the courts until they have gone to arbitration (Scott v Avery (1855)). Under the Arbitration Act 1996 (ss 45, 87), although parties can still appeal to the courts on questio ns of law, the scope of judicial control is much reduced. For example, an appeal requires the agreement of both parties or leave of the court, and parties can exclude the courts jurisdiction in non-domesti c arbitration Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 10 agreements and in domestic arbitration agreements if entered into during the arbitr ation proceedings. W2.1.2.5 Contracts prejudicial to the state A wide range of cases is included. Examples are: contracts to commit illegal acts in friendly foreign countries (eg to facilitate the forceful overthrow of the government of a friendly country (De Wutz v Hendricks (1824)); trading with the enemy in wartime, thus aiding the enemys economy (Potts v Bell ( 1800), now Trading with the Enemy Act 1939); contracts which corrupt public life (eg buying public offices or honours, Parkin son v College of Ambulance Ltd (1925), now prohibited by the Honours (see Prevention o f Abuses) Act 1925); contracts whereby a public official is paid a commission to use his position to procure benefits for another (Montefiore v Menday Motor Components Co (1918); Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd (1988)) or to vote in a ce rtain way (Osborne v ASRS (1910)). W2.1.2.6 Contracts that further sexually immoral purposes Although it is sometimes said that contracts against good morals are void, tradi tionally this means contracts perceived to promote extramarital sexual intercourse. In the past, cou rts have refused to enforce: a promise to pay a woman to be a mistress (Franco v Bolton (1797)); a promise to pay rent on premises known to accommodate the promisors mistress (Up fill v Wright (1911)); and contracts between unmarried cohabiting couples. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 11

The same results are unlikely to be reached today. Parliament and courts have co nferred some rights on unmarried cohabitees analogous to that of married couples, and judicia l attitude reflects the growing incidence of extramarital relationships and changing social mores.3 In Tinsley v Milligan (1994), no claim of illegality was made on the basis that the parties t o the agreement were lesbian lovers. And, in Armhouse Lee Ltd v Chappell (1996), the Court of Appeal denied that an agreement to advertise telephone sex lines was unenforceable for immorality; ind eed, the court criticised Cs brazen cynicism in attempting to avoid payment for As work which gener ated enormous profits for C by pleading his own immorality. However, agreements involving prostitution are likely to remain unenforceable (e g rent for premises knowingly let for prostitution in Girardy v Richardson (1793) or hire o f an ornamental carriage knowingly let to further a prostitutes trade in Pearce v Brooks (1866)). Where a contract of employment requires an employee to procure prostitutes for the employers custo mers, this would be unenforceable for illegality (Coral Leisure Group Ltd v Barnett (1981)) . W2.1.2.7 Contracts prejudicial to family life This covers two types of case. First, it invalidates contracts prejudicial to th e institution of marriage, for example: contracts not to marry (Lowe v Peers (1768)), or to pay a sum on marriage (Baker v White (1690)); paying someone to procure marriage (Hermann v Charlesworth (1905)), although the need to condemn such contracts in modern times is questionable when dating agenc ies are commonplace; 3 See Eves v Eves (1975) and Part IV of the Family Law Act 1996. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 12 Agreements are valid if made in anticipation of immediate separation. However, i t was once contrary to public policy for a couple who was married or about to marry to make a contract to provide for the contingency of separation because such agreements ma y induce parties not to perform their matrimonial duties or encourage separation (Cartwright v Cartwright (1863)). In 2008, the Privy Council opined that a postnuptial agreement (made between a married couple) is valid and enforceable (McLeod v McLeod). In 2010, the Supreme Court in Radmacher v Granatino concluded that: The court should give effect to a nuptial agreement that is freely entered into by each party with full appreciation of its implications unless in the circumstances pre vailing it would not be fair to hold the parties to the agreement. Secondly, parents cannot contract away their parental rights and duties in relat ion to their children, subject to the Adoption Act 1976. A surrogacy agreement, by which a woman agrees to carry and bear a

child for another who will assume the parental role, is unenforceable (s 1A Surr ogacy Arrangements Act 1985, as amended by s 36 Human Fertilisation and Embryology Act 1990, Re P ( Minors) (Wardship: Surrogacy) (1987)). Parents cannot by agreement oust the courts inherent jurisdic tion to make orders regarding the upbringing and maintenance of children. Pause for Reflection Rapid medical advances now raise very difficult and controversial questions abou t the desirability of supporting other contracts in this category, such as contracts to select the gen der or other attribute of ones baby and to clone human beings. W2.1.2.8 Contracts unduly restrictive of personal liberty The most obvious example is the prohibition against self-enslavement, but even e mployment contracts must not contain servile elements. A loan agreement in Horwood v Millars Timber & Trading Co Ltd (1917) stipulated that the debtor, a clerk, was not allowed to mov e to another district Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 13 and become a clerk elsewhere, not allowed to leave his house, however unhealthy it may be, and not allowed to deal with any part of his unincumbered [sic] furniture or other prope rty without the leave of the moneylender. Lord Cozens-Hardy MR observed that the agreement could prevent t he debtor from raising money for the maintenance, education, or medical treatment of his family . He commented (at 312) that Possibly slavery is too strong a word, but it certainly seems . . . to savour of serfdom. Warrington LJ added (at 314) that: The man has put himself . . . almost body and soul in the power of this money-lender. Even in the most trivial incidents of life he cannot do as he pleases. W2.1.2.9 Contracts in restraint of trade In practice, this is the most important head of illegality in modern times. A co ntract or covenant in restraint of trade is an undertaking whereby one party agrees: to restrict his freedom to trade or conduct his profession or business (what); in a particular locality (where); for a specified period of time (when). Such restraints are only valid if they are reasonable. The common law is incline d against agreements that prohibit or restrain a person from earning a living. Here, the l aw appears to impose a substantive limit on the parties contractual freedom in order to preserve it in t he long-term. In Nordenfelt v Maxim Nordenfelt (1894), it was said (at 565): The public have an interest in every persons carrying on his trade freely: so has the individual. All interference with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy, and therefo re void. That is the general rule. But there are exceptions: . . . [it] may be justified . . . if the restriction is reasonable . . . in reference to the interests of the parties concerned and reas

onable in Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 14 reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. The doctrine applies principally to three types of contract: (i) employment: where an employee covenants not to compete with his employer during or after his employment; (ii) sales of businesses: where the seller of a business and its goodwill covena nts not to carry on competing businesses; and (iii) exclusive dealing agreements: as where a garage agrees to buy all its petr ol from one supplier for a lengthy period (Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd (1967), hereafter Esso v Harper). However, the doctrine may be applied in other cases. Thus in Proactive Sports Ma nagement Ltd v Rooney (2010), the restraint of trade doctrine was applied to set aside an agree ment regulating the use of Wayne Rooneys name in connection with sponsorship and promotional activiti es entered when Rooney was 17 and bound him for eight years. The courts conclusion was based on the youth and inexperience of Rooney, the fact that the terms were practically dicta ted to Rooney, the significant limits placed on Rooneys ability to exploit his talent and the fact t hat the terms were unusual in many respects and unique in its duration ([650]). In a sense, all contr acts involve some restrictions on future freedom of action and it may be a moot point in any parti cular case whether a contract does involve a restraint of trade. Atiyah observes (326) that: it would certainly be wrong to conclude that all contracts containing restrictio ns are now open to challenge as contracts in restraint of trade, and must be shown to be rea sonable if they are to be valid. Many customary and accepted forms of business agreement ar e probably still unchallengeable (at any rate under the common law rules), even th ough they Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 15 may strictly involve some degree of business restraint. In particular, it has be en held that a person who buys land (or a building) may validly enter into some restrictions on how the land is to be used without falling foul of the restraint of trade doctrine. The general test of enforceability is whether the restrictions on the relevant a ctivity (in terms of scope, time, and locality) are no more than reasonably necessary to protect the legitimate interests of the party imposing the restraint (Esso v Harper). The onus of proving reasona bleness is on the party imposing the restraint. This test must balance: the pro-enforcement factors, such as the legitimate interests of purchasers of b

usinesses to prevent competition by vendors, or of an employer by a former employee, against the anti-enforcement factors, such as the public interest in free compet ition, an employees interest in retaining reasonable freedom to pursue a vocation and the c oncern to protect employees from unfairness resulting from their weaker bargaining powe r vis-vis their employers. (i) Employment contracts Employers are generally permitted more protection against the subsequent activit ies of senior employees (Nordenfelt Ltd v Maxim Nordenfelt Guns and Ammunition Co Ltd (1894)) than of junior or temporary employees (M&S Drapers Ltd v Reynolds (1957)). The employer must satisfy two aspects of reasonableness. First, the employer must establish his legitimate interest in imposing the restraint; that is, that he has some proprietary right, whether in t he nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is . . . reasonably necessary (Herbert Morris Ltd v Saxelby (1916) at 710). Thus, it was h eld to be reasonable to restrain employees: Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 16 who have acquired influence over the employers customers and may entice them away (eg Fitch v Dewes (1921), a solicitors managing clerk; Marion White v Francis (19 72), a hairdresser); or who have acquired trade secrets (which are protected even without an express restr aint) or confidential information belonging to the employers (Forster and Sons Ltd v S uggett (1918), involving glass-making techniques). But employers cannot protect themselves against their former employees personal s kill and knowledge even if acquired in the course of the employers business. This belongs to the employees who are free to exploit them in the market place (Faccenda Chicken Ltd v Fowler (1986)). Second, the employer must show that the scope of the restraint is reasonable in: the scope of the activity banned: it must be confined to the business of the emp loyment; thus, a covenant not to carry on any business whatsoever is void (Baker v Hedgecoc k (1888)); the extent of the locality: the restraint should cover no wider an area than is necessary to protect the employers particular interest (this may not justify a restraint cover ing a 25mile radius of London (Mason v Provident Clothing and Supply Co Ltd (1913), invo lving a canvasser for a clothing company), but may, in other circumstances, justify on e covering the whole of the United Kingdom (Forster & Sons Ltd v Suggett, taking i nto

account the secrecy of the glass production methods and the area in which the em ployer traded)); and the duration: even restraints of unlimited duration may be reasonable if they do not exceed what is reasonably required for the protection of the covenantee and are not against the public interest (Fitch v Dewes (1921)). In addition to reasonableness between the parties, an enforceable restraint must not contravene the public interest, particularly that of depriving the community of the employees sk ills and services Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 17 (Wyatt v Kreglinger and Fernau (1933); Bull v Pitney-Bowes Ltd (1967)). In pract ice, reasonableness between the parties and compliance with the public interest tend to go hand in hand. (ii) Sales of businesses The same tests of reasonableness and consistency with the public interest are ap plied to restraints in contracts for the sale of businesses, although greater latitude is permitted her e since inequality of bargaining positions is less obvious. A purchaser of a business and its goodwill is entitled to protect the value of the purchase by an appropriate restraint clause; sellers would comm and lower prices if such restraints were unenforceable. The wider the restraint, the larger the legi timate interest required to justify it. In one extreme case, a buyer of an armament business for a vast sum was permitted to restrain the seller from competing with this business anywhere in t he world for 25 years, in view of the world-wide operation of the business sold and the fact tha t its main customers were governments (Nordenfelt Ltd v Maxim Nordenfelt Guns and Ammunition Co Ltd ( 1894)). (iii) Exclusive dealing agreements These may be prohibited under Article 81 of the European Community Treaty as ant icompetitive and may attract the application of domestic law or European legislation.4 In Ess o v Harper, the owner of two garages entered into a solus agreements to buy all its petrol from Es so, to keep the garages open at all reasonable hours, and not to sell the garages without securi ng the purchasers agreement to enter similar arrangements with Esso. In exchange, Esso gave a disc ount on the petrol supplied and provided a loan. The House of Lords took a wide view of the legitim ate interests which Esso were entitled to protect. Bell comments:5 4 See R Whish, Competition Law (5th edn, LexisNexis, 2003). 5 Policy Arguments in Judicial Decisions (OUP, 1983) 170. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 18 In considering this question, they had regard to the money spent on building ref ineries and providing other outlets, the need for overall planning to justify such expenditu

re and to provide a stable system of outlets, what was reasonable in return for the advant ages conferred by the agreement, what was necessary to secure the loan, and the gener al state of the industry. Their Lordships relied on information provided in the report of the Monopolies C ommission on petrol and took the view that the contract lasting four and a half years was one rous but reasonably necessary to protect Essos interests. However, the contract lasting 21 years: could have effect in quite different conditions, so that the public interest in preserving Harpers liberty of action applied more strongly here. Although the arguments had centred on what tie could be reasonably imposed by [Esso] in support of their interests, the basis of the decision of the house was the injury, or potential injury, to the public of the limitations on Harpers freedom of action. If competition is to be a generally accepted way of running the economy, then restraints have to be justified in terms of the benefits to th e community as well as to individuals, and for this reason the public interest figures so im portantly in the considerations of the judges. However, the Court of Appeal upheld a 21-year solus agreement in Alec Lobb Garages v Total Oil (GB) Ltd (1985) where the restrained party had received a substantial sum fr om the restraining party. The court applied the dicta in Nordenfelt that the quantum of consideratio n may enter into the question of the reasonableness of the contract. Schroeder Music Publishing Co Ltd v Macaulay (1974) shows how substantive unfair ness in the contract can invalidate a restraint of trade clause. There, a young unkno wn songwriter entered an exclusive services agreement by which he agreed to assign the full copy right to all his Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 19 present and future works to the publisher for five years, renewable at the latte rs option for another five years, in return for royalties. The publisher had no obligation to publish the works, could terminate the contract on a months notice, and was free to assign its rights. The song-writer was a great success and obtained a declaration that the agreement was void as an unrea sonable restraint of trade. As Trebilcock observes, the contract was produced within a competitive ma rket so there could be no market failure justification for upsetting the terms of the contract , nor any alternative set of terms to be discovered by the technique of market transference.6 Neverthe less, the House of Lords was clearly influenced by the one-sidedness of the agreement (the publishe r giving minimal commitment in exchange for the song-writers total commitment) in setting aside th e restraint on

the writer.7 As Lord Reid said (at 1314): Normally the doctrine of restraint of t rade has no application to such restrictions . . . But if contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be jus tified before they can be enforced. W2.1.2.10 Restrictive trading and analogous agreements Cartels are agreements to regulate the production, marketing, sale price, and st andards of commodities produced. The concern with cartels is not so much unreasonableness b etween the parties, as their anti-competitive effect in reducing overall competition in a p articular commodity. The common laws role in controlling such agreements has been inhibited for a numb er of reasons. Courts are less adept at considering the broad public interest and economic issu es raised by these anti-competitive arrangements than in judging reasonableness between particular specific parties. The latter, after all, are represented in court while the public interest is ass umed to be within the 6 An Economic Approach to the Doctrine of Unconscionability, in B Reiter and J Swa n (eds),Studiesin Contract Law (Butterworths, 1980) 381. 7 See also Silvertone Records v Mountfield (1993) and Zang Tumb Tuum Records v J ohnson (1993). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 20 knowledge of judges and not specifically represented. Moreover, courts can only adjudicate on such agreements in the unlikely event that an affected party challenges its validity before the courts (Courage Ltd v Crehan (2001)). Consequently, the policing of anti-competitive ag reements is largely left to detailed legislative regulation. This is usually studied as a di stinct subject under the heading of competition law. Legislation subjects such agreements to a public inter est test applied by specialist administrative bodies.8 W2.1.3 Illegality and unfairness The illegality doctrine invalidates contracts which are undesirable in the publi c interest or otherwise unworthy of the courts assistance because they do not help individuals to achieve well-being and so realize fulfilling lives.9 While this does not directly address the question of contractual imbalance, it is consistent with the idea that contracts which are grossly unbal anced or which seriously harm the interests of one party may be undesirable in the public inter est or unworthy of the courts assistance. Although the courts present an all but static picture of t he scope of public policy, we have seen that the existing categories of illegality can be extended a nd the doctrine applied instrumentally to deny the enforcement of substantively unfair terms. In Schroeder v Macaulay (1974), Lord Diplock said candidly (at 1315) that: [W]hat your Lordships have in fact been doing has been to assess the relative ba

rgaining power of [the parties] . . . to decide whether the publisher had used his superi or bargaining power to extract from the song writer promises that were unfairly onerous to him . . . Under the influence of Bentham and of laissez-faire the courts in the 19th century aba ndoned the practice of applying the public policy against unconscionable bargains to contra cts 8 Eg the Enterprise Act 2002, the Restrictive Trade Practices Act 1977, the Comp etition Act 1998,the Resale Prices Act 1976, and Articles 81 and 82 of the European Community Treaty. 9 J Raz, The Morality of Freedom (OUP, 1986) ch 14. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 21 generally, as they had formerly done . . . but the policy survived in its applic ation to penalty clauses and to relief against forfeiture and also to . . . restraint[s] of trade . If one looks at the reasoning of 19th century judges in cases about contracts in restraint of trade one finds lip service paid to the current economic theories, but if one looks at what they sai d in the light of what they did, one finds that they struck down a bargain if they thought it w as unconscionable as between the parties to it and upheld it if they thought that i t was not. So I would hold that the question to be answered . . . is: was the bargain fair? We have seen that substantively unfair contracts can also be invalidated by othe r doctrines such as undue influence (see 9.2); incapacity (see Web ch 1); unconscionable bargains (s ee 10.4); and the special rules applicable to exemption (chs 1011), penalty, and forfeiture clauses (see 14.3). In this context, the doctrine on non-commercial guarantees (see 9.3) can be understood a s a recently created head of public policy. Our discussions of these doctrines and rules reve al the extent of their concern with procedural and substantive unfairness. Collins (289) locates the rea l objection to the contract in Schroeder v Macaulay in terms of power, fairness, and co-operation. He explains: Because the composers career was completely dependent upon the publishers discreti on for a period up to ten years, his degree of subordination to another represented an unjustifiable form of domination. The absence of an undertaking on the part of t he publisher to publish any of his songs rendered the exchange too one-sided to be fair. In a ddition, because the composer could not terminate the agreement during its fixed period, he had no effective sanctions against the publisher to ensure that at least it made reason able efforts to bring the venture to fruition by publishing and promoting his work . . . [T]he c oncern about unjustifiable domination, the equivalence of the exchange, and the need to ensur e cooperation . . . motivate the decision in Schroeder Music Publishing Co Ltd v M

acaulay. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 22 W2.2 The effects of illegality While the general rule and starting point is that courts will not help parties e nforce illegal contracts, nor give restitution of benefits conferred under them, illegal contracts are not devoid of legal effect. Complex exceptions reflect the conflicting policies in this area. The policies a gainst assisting parties to illegal contracts are that: (i) courts should not help parties who knowingly enter illegal contracts; (ii) justice would be tainted and the dignity of the court offended; and (iii) people should be deterred from entering illegal contracts. On the other hand, these policies are not offended and some judicial assistance is justifiable, whether by way of enforcement or restitution, where: (i) parties are ignorant of the illegality involved or were wrongly induced to c ontract; (ii) the relevant illegality does not involve gross moral turpitude, such as rob bery or terrorism, but merely the infringement of technical regulations; (iii) a party has withdrawn from the illegality; or (iv) a party would be unjustly enriched at the expense of the other. W2.2.1 The enforceability of the contract The laws approach to the enforceability of illegal contracts can be divided into three principal categories: (i) contracts which are illegal per se (at formation); (ii) contracts which are not illegal per se, but further an illegal purpose; and (iii) contracts which are not illegal per se, but involve some illegality in the ir performance. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 23 Diagram W2B gives an overview of the effect of illegality on the enforceability of a contract. W2.2.1.1 Illegality at formation The law adopts the strictest attitude to contracts that are illegal when entered because they cannot be performed without commission of an illegality. Contracts which are expressly or impliedly forbidden by statute or by public policy are unenforceable even if both parties are ignorant of the facts constituting the illegality and did not intend to break the law. Re Mahmou d and Ispahani (1921) provides an example of statutory prohibition affecting both parties. The parties bought and sold linseed oil without the required licences; the seller could not recover dam ages for the buyers non-acceptance although the buyer had misrepresented that he had a licence. Scru tton LJ (at 730) left open the question of whether the seller would have a remedy for deceit. In Quereshi v Circle Properties and others (2004), Q was denied an order to freeze Cs assets to enforc e a commission agreement because, at the time the agreement was made, Q was an undischarged ban krupt and

could not engage in estate agency work. Section 23 Estate Agents Act 1979 render ed any commission agreement with the claimant invalid or unenforceable. An example of c ommon law prohibition is a contract which involves trading with alien enemies in wartime. It may be very difficult to decide whether a statute or head of public policy: (a) renders the contract unlawful per se and bars enforcement by either party, o r (b) merely bars enforcement by a guilty party (ie one who knows of the illegalit y). The question is whether, having regard to the mischief against which the illegal ity is directed and the circumstances in which the contract was made and is to be performed, it woul d be contrary to public policy to enforce it (Shaw v Groom (1970)). In view of the potential hars hness of (a), the modern tendency is to prefer (b) unless (a) is very clearly demanded by the stat ute or public policy. Thus, neither party can sue on the contract if both parties: Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 24 know that contractual performance would be or is intended to involve illegality or contravention of public policy (Ashmore, Benson Pease & Co Ltd v Dawson Ltd (197 3); or share an illegal purpose (Bigos v Bousted (1951)). Diagram W2B The enforceability of illegal contracts Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 25 The effect is to give one party an unmeritorious and technical defence to an act ion for breach. The justification is that: No court will lend its aid to a man who founds his cause o f action upon an immoral or illegal act . . . not for the sake of the defendant, but because they will not lend their aid to such a plaintiff (Holman v Johnson (1775) at 343). Kerr LJ explains in Euro-Di am Ltd v Bathurst (1990) that: It applies if in all the circumstances it would be an affro nt to public conscience to grant the plaintiff the relief which he seeks because the court wo uld thereby appear to assist or encourage the plaintiff in his illegal conduct or to encourage others in similar acts. However, a court may assist an innocent claimant by allowing an action which doe s not require reliance on the illegal contract. For example: (i) Finding and enforcing a collateral contract not tainted by illegality: In St rongman (1945) Ltd v Sincock (1955), the claimant did building works for which it had no licence and so could not claim payment for it since the contract is absolutely prohibited by st atute. However, the defendant had promised to obtain the necessary licences and the Court of Appeal allowed the claimant to enforce a collateral warranty that the defendant would obtain the ne cessary licences. (ii) Awarding damages for fraudulent misrepresentation: In Shelley v Paddock (19

80), P fraudulently induced S to buy land in Spain that P did not own in a contract whi ch breached the Exchange Control Regulation. P sought to retain Ss purchase money by relying on t he illegality. The Court of Appeal held that the illegality did not bar an action in the tort o f deceit; this allowed S to recover her money and an additional sum for distress. P could not retain the profits of its own fraud. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 26 W2.2.1.2 Intention to achieve an illegal purpose or perform illegally A contract which is not illegal per se, but which is intended to further an impr oper purpose or to be performed in an illegal manner, is generally unenforceable by the party contract ing with the illegal intention, or knowing of the other partys illegal intention.10 In Taylor v Bhail (1996), T had provided an estimate inflated by 1,000 so that B could defraud an insurance compa ny. The Court of Appeal held the contract to be single and indivisible so that T could not enf orce it. Moreover, T could not circumvent the illegality by claiming a quantum meruit for the work do ne. However, a claimant who is innocent of the others illegal purpose, and where the contractual performance does not necessarily entail an illegality, can: (i) Recover what is due under the contract, or obtain expectation damages:11 In Bloxsome v Williams (1824), W warranted that the horse sold to B was no more tha n seven years old and sound, when it was 17 years old and unsound. In defence to Bs action for breach, W unsuccessfully pleaded his own illegality in trading horses as a horse-dealer on a Sunday in contravention of the Sunday Observance Act 1677; B was ignorant of Ws status. (ii) Recover reasonable remuneration for work done prior to discovery of the ill egality. In Clay v Yates (1856), a printer recovered the value of work done to publish a tre atise up to the point that its defamatory content was discovered. (iii) Refuse to perform the contract on discovering the illegality: In Cowan v M ilbourn (1867), M agreed to let rooms to C for certain days but was allowed to refuse to proceed when he found out that they were to be used for lectures which were blasphemous and so u nlawful. 10 Cowan v Milbourn (1867); Alexander v Rayson (1936) at 182. 11 Mason v Clarke (1955) at 793, 805; Fielding & Platt Ltd v Najjar (1969); Newl and v Simons and Willer (Hairdressers) Ltd (1981). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 27 Even a contract entered into with the intention of committing an illegal act is enforceable if: (a) The illegality is too remote from the contract. In 21st Century Logistic Sol utions Ltd (In Liquidation) v Madysen Ltd (2004), C brought an action for the price of goods sold and delivered to M who denied liability on the ground of the illegali

ty of contract. Cs operations sought to defraud Customs of Value Added Tax by buying goods VAT-free in the EU and selling them on plus VAT in the UK. Field J held that the contract was lawful in itself and that Cs fraudulent intention was too remote from the contract to make it unenforceable for illegality. C only commits a fraud when he fails to account to Customs at the end of the relevant accounting period. (b) The claimant is seeking to enforce a statutory entitlement attaching to the contract without relying directly on or effectively enforcing the illegal contra ct. In Hall v Woolston Hall Leisure Ltd (2001), H successfully brought a complaint of unfair dismissal on the ground that she had been sexually discriminated against when she was dismissed from her job as a chef when she became pregnant. The Court of Appeal held that she was entitled to compensation although she had acquiesced in receiving wages for three years without deductions for tax and national insurance. There was no causal link between Hs acquiescence in how her wages were paid and her complaint of sex discrimination. There were no public policy reasons for not awarding H compensation. In Laong Wheeler v Quality Deep Ltd (2004), W successfully sued for unfair dismissal and for failure to give itemised pay slips contrary to s 8 Employment Rights Act 1996. Although W had received wages without deductions for tax and national insurance, there was no evidence that W was aware of any illegality; she had a limited knowledge of English and of the tax and national insurance provisions of the UK. In contrast, in Vakante v Addey and Stanhope School (2004), the Court of Appeal barred V from claiming race discrimination and victimisation when he was dismissed from his job. V had falsely indicated in his application form that he did not need a work permit, when he knew that, as an asylum seeker, he was not permitted to work in the UK. The test is whether the applicants claim arose out of, or was so clearly connected or inextricably bound up or linked with, the illegal conduct of the Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 28 applicant that the court could not permit the applicant to recover compensation without appearing to condone that conduct. The test was not simply a question of causation; the circumstances surrounding the applicants claim and the illegal conduct, the nature and seriousness of the illegal conduct, the extent of the applicants involvement in it, and the character of the applicants claim were all relevant. On the facts, Vs complaints were so inextricably bound up with the illegality of his conduct in obtaining and continuing the employment that, if he were permitted to recover compensation for discrimination, the court would appea r to condone his illegal conduct. W2.2.1.3 Subsequent illegality of means Where the contract is not illegal per se (see W2.2.1.1), is not entered for an i llegal purpose or with an intention to perform it in an illegal way (W2.2.1.2.), but is subsequently pe rformed in an illegal manner, the enforceability of the contract depends on whether the way in which th e contract was performed turned it into the sort of contract that was prohibited (St John Shippi ng Corporation v Joseph Rank Ltd (1957) at 284). For example, in Anderson Ltd v Daniel (1924), th e seller of agricultural fertiliser could not recover the price because he failed to give th e purchaser the required invoice showing the composition of the fertiliser; the seller failed to perform the contract in the

only way that the statute allowed the contract to be performed. Again, if legisl ation prohibits certain activity unless licensed (eg Re Mahmoud and Ispahani), a contract to carry out u nlicensed activity will generally be unenforceable (Bostel Bros Ltd v Hurlock (1949)). However, where the illegality is purely technical and at the low end of blame-wo rthiness (eg if the speed limit or permitted driving hours in performing a contract for t ransportation of goods are exceeded), a strict bar on enforcement could inflict on the wrongdoer a loss far greater than the statutory penalty. Thus, it has been held that: The fact that a party has in the course of performing a contract committed an unlawful or immoral act will not by itself prevent him f rom further enforcing that contract unless the contract was entered into with the purpose of doing that unlawful Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 29 or immoral act or the contract itself (as opposed to the mode of . . . performan ce) is prohibited by law (Coral Leisure Group Ltd v Barnett (1981) at 509)). The question is whether t he statutory purpose is to make the contract unenforceable by the parties or merely to impose a penalty on the offender. In St John Shipping Corporation v Joseph Rank Ltd, S, the ship-owner, was prosecuted and fined for committing the statutory offence of overloading its ship in perfor mance of certain contracts for the carriage of goods. The court allowed S to sue J for unpaid fre ight, despite this illegality. The purpose behind the statute was to penalise the conduct which con travened the statute and not to prohibit the contract itself. Similarly, in Shaw v Groom (1970), a la ndlord committed an offence by failing to give his tenant a rent book but could nevertheless sue for rent because the purpose behind the legislation was to punish the conduct and not to invalidate t he tenancy agreement. The other party (not guilty of the illegal performance) can generally enforce th e contract if he did not know of or consent to the illegality. In Archbolds (Freightage) Ltd v S Spanglett Ltd (1961), S agreed to transport As whisky but did so in an improperly licensed van. When Ss negligence resulted in the loss of As whisky, S pleaded its own illegality in def ence to As claim. The Court of Appeal (at 390) rejected As defence since the statutory purpose was sufficiently met by the penalties prescribed, and the avoidance of the contract would cause grave inconvenience and injury to innocent members of the public without furthering the object of th e statute. A party is not innocent if he is aware of the illegality. In Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd (1973), D used lorries that were unlawful for transporting As load. When the load was damaged in transit, As claim for damages failed because As manager knew of the ill

egality and so was regarded as having participated in it. This applies even if a party only kno ws the facts constituting the illegality but not the law making the performance illegal. In J M Allan Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 30 (Merchandising) Ltd v Cloke (1963), a contract to hire a roulette table to play a game which was statutorily unlawful was unenforceable although neither party knew that the game was illegal. W2.2.1.4 Severance It may be possible to sever the illegal part of the contract and enforce the rem ainder. The most obvious examples are restraint of trade clauses and clauses which oust the court s jurisdiction. However, severance will only be permitted if enforcement of the rest of the cont ract would not subvert the policies underlying the illegality. If an agreement is very objectio nable (smelly), the courts will be reluctant to allow partial enforcement by cutting out the bad bits; the whole contract is infected (as in Napier v National Business Agency Ltd (1951) where fraud on t he revenue was involved). However, where the illegality is based on legislation or public polic y protecting a certain class of persons, there is no objection to severing the illegal provisio n and enforcing the contract in favour of a member of the protected class even if he participated in the illegality. In Ailion v Spiekermann (1976), a lease was not illegal although the landlord recei ved an illegal premium. The tenant could enforce the lease without paying the premium. Even if severance would not subvert the policy undermining the illegality, court s are reluctant to re-write the contracts and will only allow severance if: the illegal part can be cut out without distorting the meaning of the remaining contract (the blue pencil rule, Goldsoll v Goldman (1915)); the illegality does not form one partys whole or main consideration for the contr act (otherwise the other party would be compelled to perform for no or virtually no consideration, Bennett v Bennett (1952)); and severance would not leave a substantially different contract from that which the parties agreed (Attwood v Lamont (1920)). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 31 W2.2.2 The availability of restitution Courts may not only refuse to assist guilty parties in enforcing illegal contracts , they may also refuse to help parties recover money or property transferred under an illegal co ntract. The law of unjust enrichment governs the circumstances when a party can recover benefits co nferred, whether or not pursuant to a contract. Here, illegality is not a ground for restitution; rather, it operates predominantly as a defence to an action for restitution on other established gro

unds (eg mistake or failure of consideration). The justification for barring restitution for illegal ity is based on deterrence. But deterrence must be weighed against the policy of preventing unju st enrichment. The upshot is to admit three exceptions when a party to the illegal contract may cla im restitution; namely, where the claimant: (i) is less blameworthy than the defendant; (ii) has withdrawn from the transaction before it is substantially performed; or (iii) can establish a legal or equitable proprietary right to the property indep endent of the illegal contract. Diagram W2C gives an overview of the availability of restitution of benefits tra nsferred under an illegal contract. The general rule against restitution was challenged in Shanshal v Al-Kishtaini ( 2001) as contravening the Human Rights Act 1998 (specifically, Article 1 of the First Pro tocol to the European Convention on Human Rights, which provides that no one shall be deprived of his possessions except in the public interest). Shanshal involved contracts made in b reach of UN sanctions on trade with Iraqi citizens. The Court of Appeal denied the claim for restitution of money paid on the basis that this (i) did not amount to a deprivation of possess ions, and (ii) anyway, would fall within the public interest exception permitted by Article 1. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 32 Diagram W2C Restitution of benefits transferred under an illegal contract W2.2.2.1 Unequal blame A claimant who is relatively less blameworthy may claim restitution if: (i) The contract is rendered illegal by a statute enacted to protect a class of persons to which he belongs. In Kiriri Cotton Co Ltd v Dewani (1960), the illegality involv ed legislation prohibiting landlords from demanding premiums from tenants; since the legislativ e purpose is to protect tenants, they can recover such payments even if they were willing parties to the illegality (see now s 125 Rent Act 1977). Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 33 (ii) He can establish some ground of restitution showing that he was ignorant or innocent of the illegality. Thus, for example, restitution has been allowed where the claima nt was induced into the illegal contract by the defendants fraud (Shelley v Paddock (1980)) or pressu re amounting to duress (Smith v Cuff (1817)). Restitution is also allowed where a claimants ignorance of some fact making the contract illegal amounts to a mistake of fact (Oom v Bruce (1810)) or of law (Kl einwort Benson Ltd v Lincoln City Council (1999)). The latter is highly significant given the prevalence of c ontracts rendered illegal by legislation of which the contract parties are ignorant. Restitution is now permi

tted unless to do so would undermine the purposes and policies underlying the legislation. W2.2.2.2 Timely withdrawal The law provides some incentive for parties to repent and discontinue an illegal contract. Where a party withdraws in time, he can recover the benefits he has conferred on the other par ty. It has been held that there is no genuine withdrawal if the claimant discontinues the illegality only because: it is discovered (Alexander v Rayson (1936)); the defendant refuses to proceed (Bigos v Bousted (1951)); or some other event beyond his control frustrates the illegality. However, the Court of Appeal has diluted the requirements of timely withdrawal i n Tribe v Tribe (1995). It held (at 135) that genuine repentance is not required . . . volu ntary withdrawal from an illegal transaction when it has ceased to be needed is sufficient. Thus, recovery was allowed where a father transferred shares to his son for the illegal purpose of defraudi ng his creditors but the fraud was not perpetrated because the claims were settled. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 34 Counterpoint 1. The decision in Tribe is questionable since there is no need to provide any i ncentive for withdrawing when the need for the illegality has passed. Quite the reverse, this approach leaves the transferor with nothing to lose and everything to gain from entering the illegal transaction. Note that the fathers withdrawal was only signalled when he claimed the return of the shares. 2. Tribe is also questionable on the issue of when the opportunity to withdraw i s extinguished. There has been long-standing uncertainty over whether partial performance extinguishes the opportunity to withdraw. Taylor v Bowers (1876) says no, only completed performance will extinguish, while Kearley v Thomson (1890)) says yes, substantial performance will extinguish.12 Tribe apparently reso lves this uncertainty by holding that a party cannot withdraw if any part of the illegal purpose had been carried into effect (at 121, 135). However, this was then applied to the facts in a rather surprising way. The cour t concluded that the father had effectively withdrawn because, despite full performance (transferring the shares ), no part of this purpose was achieved as no creditors were deceived. It will be a moot point in any case whet her the partial or even full performance of the illegal transaction has achieved a significant enough part of its purpose to extinguish the opportunity to withdraw. The degree of moral blameworthiness may be relevant to this question, so that recovery is unlikely if money is paid to commit kidnap or murder.13 W2.2.2.3 Independent property rights A party can recover property transferred under an illegal contract if his claim rests, not on the illegal contract, but on the claimants independent legal or equitable proprietary right in that property. The permissible plea is: give it back, its mine; the impermissible plea is: give it back, you only

have it because of our illegal contract. This exception is difficult partly becau se it rests on technical rules of property law. One rule is that when parties to an illegal contract intend to transfer a proprietary interest (whether of ownership or a lesser interest such as bailment or lease), the inval idity of their contract does not prevent property from passing (Singh v Ali (1960)). Where ownership has pass ed, the transferor cannot reassert ownership without pleading the illegality of the contract; this is impermissible and no 12 See J Beatson, Repudiation of Illegal Purpose as a Ground for Restitution (1975 ) 91 LQR 313. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 35 recovery lies. However, where a more limited proprietary interest is transferred under the illegal contract, only that portion is tainted by the illegality. The reasoning is that on the ter mination of that interest (eg expiry of a lease or breach of some condition), the transferor can assert his an terior legal proprietary interest unaffected by the tainted (but now extinguished) temporary interest. This principle has been accepted (Belvoir Finance Co Ltd v Stapleton (1971)) alt hough its application is a matter of some controversy. In Bowmakers Ltd v Barnet Instrumen ts Ltd (1945),14 the claimant sold the defendant machine tools on three hire-purchase agreements in contravention of the Defence Regulations. The defendant, in breach of the agreements, sold some of th e tools and refused to return the remainder. The Court of Appeal allowed the claimants claim for damages in the tort of conversion because the defendants right to possess the goods terminated on its br each of the hire-purchase agreements, and so the claimant could establish its title to the machine tools w ithout relying on the illegal transactions. Counterpoint Three criticisms can be made of the Bowmakers decision: 1. The claimant was relying on the illegal contracts to say when the defendants m ore limited interests expired, resurrecting his own proprietary right. 2. Although the defendants possessory right in the goods which it sold was termin ated, its possessory right in the goods it retained was not; yet all possessory rights were regarded as ter minated. 3. By assessing damages for conversion by reference to the value of the machine tools, the court in effect allowed the enforcement of the illegal hire purchase contracts. On the other han d, to deny the claimant a remedy would confer a windfall on an unmeritorious defendant. Thus, the propriet ary approach may lack remedial flexibility; Coote observes that: the real difficulty lies in the arbitr ary, all-or-nothing character of the common law governing illegal contracts.15 13 Kearley v Thomson (1890) at 747. 14 C J Hamson, Illegal Contracts and Limited Interests (1949) 10 CLJ 249. 15 Another look at Bowmakers v Barnet Instruments (1972) 35 MLR 38, 51. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012.

36 The principle of protecting a claimants anterior legal proprietary interest has b een extended to the situation where the claimants proprietary interest in the goods is equitable. In Tinsley v Milligan (1993), the parties jointly purchased a house to live in. They registered it in Ts name only so that M could make fraudulent claims from the Department of Social Security. M later repented and informed the DSS. The parties quarrelled and T asserted her sole legal ownership. M counterclaimed for a declaration that, in equity T held a half share in the house on trust for her because of her contribution to its purchase price. T countered that M could not invoke the assistance of equity since she di d not come with clean hands, having participated in the fraud. The minority of the House of Lords (Lord s Goff and Keith) agreed, but Lord Browne-Wilkinson in the majority held (at 371) that [i]f the law is that a party is entitled to enforce a property right acquired under an illegal transaction, in my judgmen t the same rule ought to apply to any property right so acquired, whether such right is legal or equitabl e. M could succeed because she did not have to rely on the illegality to establish her equitable in terest. Rather, she could only rely on ordinary principles of English trusts law which presumes that where two people contribute to the purchase of property which is put into the name of only one of them, the lat ter holds the property on a resulting trust for both parties in shares proportionate to their contribution . To rebut this presumption and retain the whole property it was T who would have to rely on the illegality and she was barred from doing so. Counterpoint The decision in Tinsley can be criticised on two grounds: 1. Ts equitable proprietary interest is not independent of the illegal transaction; it was non-existent prior to the illegal transaction, but was born of it. 2. The rules determining the existence of such equitable proprietary interests a re out-dated and may operate arbitrarily. The resulting trust raised is based on a presumption that the contr ibuting party whose name is left off the title does not intend to gift his contribution to the party who holds so le legal title to the property. However, there is a presumption of advancement (ie a presumed intention to gift) w here: Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 37 a husband confers a benefit on his wife, or parents confer benefits on their children. Thus, in Tinsley, if M had been Ts husband or parent, Ms claim would have failed s ince M would have had to rely on the illegality to rebut the presumption. Ms claim succeeded because he r relationship to T, of lesbian lovers, was not one to which the presumption of advancement attached. To day, it is questionable whether the outcome should depend on whether the parties are married and whether the claimant is the

husband or the wife. The independent proprietary rights approach supports the policy of avoiding unju st enrichment (see Tinsley at 366), but it relies too heavily on the mechanical application of highl y technical and procedural concepts (Beatson, 411). As Rose observes,16 it avoids directly confro nting the issue of illegality and openly weighing its gradations of impropriety the extent of the p arties participation and responsibility and the degrees of injustice because of unjust enrichment. For a time, these considerations led to the development of a flexible discretionary test whereby courts could all ow recovery unless to do so would affront the public conscience . . . because the court would thereby appear to assist or encourage the claimant in his illegal conduct or to encourage others in similar acts (Euro-Diam Ltd v Bathurst (1990) at 35). But in Tinsley, the House of Lords rejected such a test because: it contradicts a long line of authority going back to Holman v Johnson (1775), t hat courts would not lend their aid to someone resting their action on an illegality; and it would make relief dependent on judicial discretion rather than on rules and t his should be sanctioned by the legislature. Counterpoint This rejection of a discretionary approach in favour of the technical proprietar y rights approach is regrettable: 1. It can lead to too much restitution, as where a claimant can make out an indep endent legal or equitable proprietary right despite strong policies against restitution. For example, a cl aimant who lends 16 F Rose, Reconsidering Illegality (1996) JCL 271. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 38 housebreaking equipment, a get-away car, or paedophilic pornography can, in prin ciple, ask the court to get it back after the offences have been committed; a claimant who contributes to th e purchase of a property for use in terrorism can ask for a resulting trust to be declared. A court may not c ountenance recovery (Bowmakers at 72), but it is difficult to see how a principle which entitles a p arty to recover his property can properly make this sort of distinction (Tinsley, per Lord Goff at 362). 2. Equally, the proprietary approach may lead to too little restitution, as wher e restitution is denied simply because of the rules on presumptions of advancement (husbands in favour of wives and parents in favour of children) when other factors point to the desirability of restitution. 3. Such potential for injustice can lead to another problem; inconsistent applic ation of some rules and the distortion of other rules to avoid unjust results. In Tribe v Tribe (1996), sinc e a father transferred his shares to his son to defraud his creditors, the presumption of advancement should have applied to negate any resulting trust in favour of the father. The logic of the proprietary approach s hould have denied restitution since the father could only rebut the presumption of advancement by reliance on his illegal purpose. The court nevertheless returned the shares to the father by switching to, and arguab

ly over-stretching, the timely withdrawal exception (see W2.2.2.2). As stated above, there was no merit in the father withdrawing from an illegality once the necessity for it had passed and no need for the law to provi de an incentive to do so. The proprietary approach was rejected by the High Court of Australia in Nelson v Nelson (1995) for yielding results which are essentially random and produce windfall gains as well as losses (at 189). The High Court continues (at 190): The Bowmakers rule has no regard to the legal and equitable rights of the partie s, the merits of the case, the effect of the transaction in undermining the policy of the rele vant legislation or the question whether the sanctions imposed by the legislation sufficiently pr otect the purpose of the legislation. Regard is had only to the procedural issue; and it i s that issue and not the policy of the legislation or the merits of the parties which determine t he outcome. Basing the grant of legal remedies on an essentially procedural criterion which has nothing Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 39 to do with the equitable positions of the parties or the policy of the legislati on is unsatisfactory particularly when implementing a doctrine that is founded on publ ic policy. In Nelson, a mother provided the money to buy a house which was put into the nam es of her two children so that she could unlawfully obtain a subsidised advance from a governm ental body to buy another property. In spite of her lack of clean hands and the presumption of advan cement to her children, the court allowed her recovery of the first house on condition that sh e recompensed the body advancing the subsidy. The test was whether restitution would undermine the policy of the statute. The sanction for illegality must further the purpose of the statute and n ot impose an additional sanction over and above that which the statute deems sufficient. More over, the sanction should be proportionate to the seriousness of the illegality involved assessed by reference to the statute (at 192). W2.2.3 The future: the Law Commissions suggestion Lord Goff conceded (in Tinsley at 355, 364) that the illegality doctrine is not a principle of justice, it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences . . . the principle allows no room for the exercise of any discreti on by the court in favour of one party or the other; it is capable . . . of producing injustice. Howev er, he viewed any wide-ranging reform as a matter for Parliament after a full inquiry by the Law C ommission. He made particular reference to New Zealands Illegal Contracts Act 1970,17 which giv es courts very wide discretionary powers to grant relief having regard to a non-exhaustive list

of factors. 17 M Furmston, The Illegal Contracts Act 1970An English View (1972) 5 NZULR 151. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 40 The English Law Commission had provisionally proposed legislative reform to give the courts discretionary powers18 to decide when illegality should operate as a defe nce. It had suggested giving the courts a statutory discretion to decide whether the claiman ts involvement in some form of illegality should act as a defence to the claim, to be determined a ccording to a list of factors. However, this approach was rejected in its 2009 Consultative Report (No 189) The Illegality Defence. The Law Commission concluded that it would be impossible to create a workable system of rules to determine when the illegality defence should operate in claims for contractual enforcement, the reversal of unjust enrichment or tort. Instead, the Law Commission recommends that reform should be left to the courts. It suggests that a more tra nsparent, discretionary approach should be taken. In each case, judges should consider whe ther the application of the illegality defence is justified on the basis of the policies that underlie that defence. This involves a balancing exercise, with the defence only being allowed if it would be a proportionate response to the illegality and can be justified by a particular pu blic policy rationale. The Law Commission considers that the new approach would not lead to any major c hange in the outcome of cases, but would increase the transparency of decisions. The Law Commission advocates legislative reform in the area of trusts, since it would not be open to a lower court to depart from Tinsley v Milligan. It considers that co urts should be given a structured discretion to deprive a beneficial owner of his or her interest in the trust in limited circumstances (Law Com No 320). Otherwise, legislation was thought unnecessary i n view of the incremental developments in case law such as Moore Stephens v Stone Rolls Ltd (2 009), where the House of Lords held that the fraud of the director and sole shareholder of a com pany was attributable to the 18 Law Commission Consultation Paper (No 154) of 1999, Illegal Transactions: The Effect of Illegality on Contracts and Trusts. Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 41 company, so that the creditors standing in its insolvent shoes were barred from bringing a claim for negligence against the auditors for failing to detect the fraud. THIS CHAPTER IN ESSENCE 1 In general, courts will not assist parties to a contract which is illegal or c ontrary to public policy (either as to its means or ends) by enforcing the contract or perm itting

recovery of benefits conferred under it. 2 Contracts may be illegal by reference to statutes or contrary to public policy under the common law. The courts are opposed to recognising new categories of public policy but are prepared to extend existing categories, which include contracts: to commit a crime or a civil wrong, to oust the jurisdiction of the court, interfering with the administration of justice, prejudicial to the state, furthering sexually immoral purposes, prejudicial to family life, and unduly restrictive of personal liberty. 3. Contracts in restraint of trade are void and unenforceable unless they are reasonable, taking into account the legitimate interests of (i) one party to pro tect its interests, (ii) the other to pursue an activity, and (iii) the public to benefit from free competition. The doctrine applies mainly to restrain employees from competing with employers during or after the employment, and to restrain sellers of busine sses and their goodwill from competing with the buyer. Similarly, exclusive dealing contracts are also judged by their reasonableness. 4. If a contract is illegal at formation, being expressly or impliedly prohibite d by statute or contrary to public policy, the contract is unenforceable by either pa rty Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 42 irrespective of their good faith. The court will be slow to reach this conclusio n because of the potential harshness it can visit on a good faith claimant. Howeve r, such a claimant may, in appropriate cases, have an action for breach of a collat eral contract or for deceit. 5. Contracts which are legal at formation but intended to further an improper pu rpose or to be performed in an illegal way are unenforceable by parties having, or knowing of, such an intention, unless the purpose behind the illegality is the protection of a class of persons to which the claimant belongs and enforcement o f the contract would not undermine that purpose. Even the claimant who intends (or knows of the defendants intention) to further an improper purpose or perform in a n illegal manner may still be able to enforce the contract if (i) the illegality i s too remote from the contract, or (ii) the claimant is seeking to enforce a statutory entitlement attaching to the contract (eg employment) which does not rely direct ly on, or effectively enforce, the illegal contract. 6. Where the illegality only attaches to the performance of a contract which is valid at formation, the contract is enforceable by the guilty party, if provided that the purpose behind the statute or public policy violated does not effectively prohib it the contract. The other party can enforce the contract if he is ignorant of the illegality, but not otherwise. If the policy underlying the illegality does effe ctively prohibit the contract then neither party can enforce the contract.

7. The court may be prepared to sever the illegal part of the contract and enfor ce the remainder where severance would not distort the remainder, substantially change the contract, or deprive one party of substantially the whole or main considerat ion under the original contract. 8. The general bar against recovery of benefits conferred under an illegal contr act is subject to three exceptions. Namely, where the claimant: (i) is relatively less blameworthy than the other party (unequal blame); (ii) withdraws from the illegal purpose in time (timely withdrawal), or Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 43 (iii) can establish an independent proprietary right to the money or property tr ansferred to the other party without relying on the illegal contract (enforcement of proprietary right) QUESTIONS 1 The content of illegality and public policy cannot remain immutable, but must c hange with the evolution of public opinion, morality, and legislative policies. When an d why are contracts tainted by illegality? 2 What is wrong with contracts in restraint of trade? Are they ever enforceable? 3 The effect of illegality on the validity of a contract depends on a variety of factors. Discuss 4 Do you agree with the Law Commissions recommendation that courts should have discretion in deciding whether or not illegality should be a defence to a claim for contractual enforcement? What factors should the court take into account in exercising such discretion? 5 When is restitution of the benefits conferred under an illegal contract permit ted, and when should it be? 6 The illegality doctrine is not a principle of justice, it is a principle of pol icy, whose application is indiscriminate and so can lead to unfair consequences. It allows no room for the exercise of any discretion by the court and is capable of producing injustice. Discuss 7 Alfred was a licensed haulier under the (fictitious) Licensing and Regulation of Road Hauliers Act 2005. Section 1 of the Act makes it a criminal offence for any road haulier to operate without a licence. Section 2 requires all loads carried to be accompanied by a statutory invoice detailing its content and certifying the hauliers compliance with safety regulations relating to loading and driver breaks . Advise Alfred in the following circumstances: Chen-Wishart: Contract Law 4e Mindy Chen-Wishart, 2012. 44 (a) Alfred delivered a load for Bob but failed to provide a statutory invoice at the time of delivery because he did not notice that it had fallen out of his truck during one of his stops Bob refuses to pay (b) Alfred delivered a load for Camilla but failed to provide a statutory invoic e at the

time of delivery because Camilla said she did not need one. Camilla refused to p ay but insisted that Alfred pay for the goods damaged in transit. (c) Alfred delivered an urgent load for Delia in breach of the safety regulation s by taking insufficient breaks during the journey at Delias request. Delia refuses to pay. If Delia has pre-paid but calls off the contract before Alfred was due to take h is first safety break, can she recover the sum from Alfred? (d) Alfred agreed to carry a load for Errol which Errol had paid for in advance. Alfred refuses to perform the contract when he discovers that his licence has expired. Can Errol compel Alfred to return the payment? (e) Alfred transfers one of his trucks to Fifi (his daughter) in a sham transact ion to keep it out of the hands of his creditors. After Alfred reached a settlement wit h his creditors, Fifi refuses to return the truck, claiming that it is hers. For hints on how to answer these questions, please see the Online Resource Centr e at http://www.oxfordtextbooks.co.uk/orc/chenwishart4e/ KEY FURTHER READING Buckley, R (1983), Illegality in Contract and Conceptual Reasoning, 12 Anglo-Ameri can LR 280. Buckley, R (2000), Illegal Transactions: Chaos or Discretion?, 20 Legal Studies 15 5 Law Commission (1999), Consultation Paper No 154, Illegal Transactions: The Effe ct of Illegality on Contracts and Trusts For updates to this chapter and links to websites relevant to the topics covered , please take a further look at the website.